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Chapter 6 Tendering Awarding Contract
Chapter 6 Tendering Awarding Contract
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Figures
FIGURE 6.1: Where We are in the Process Cycle ........................................... 6
FIGURE 6.2: Open Tender: One- and Two-Stage Processes ........................ 12
FIGURE 6.3: Dialogue or Interactive Process: EU Competitive Dialogue ...... 13
Tables
TABLE 6.1: Examples of Bidding Periods in Different Countries .................... 15
TABLE 6.2: Examples of time periods between contract signature and financial
close ......................................................................................................... 35
1 For the sake of simplicity, the explanation of the process will not include the fact that in some processes
the proposal may be staged. This involves submitting at least two proposals, the initial and the final offer.
• Time to prepare and submit offers: This will usually be longer than in a
conventional procurement. Due to the intricacies of the PPP processes
(including complexities faced by the private partner), it is essential to grant
the bidders sufficient time for proper due diligence, analysis, and
assessment of the project and the contract from different fronts. This is
discussed in section 5;
• Time for evaluation: Evaluating PPP bids is a more complex matter than
evaluating conventional contracts. PPP evaluation requires a knowledge
of both the PPP’s technical and financial features, including the
particularities of the technical proposal and how it interacts with the
financial sustainability of the offer.
Linked with the higher risk of challenges is also a need to be accurate and
stick with the rules and methodology for bid evaluation (and
selection/qualification) as described in the RFP (section 9. discusses the
practicalities of evaluation management); and
There are usually some other prior requirements for contract signature,
such as contracting (or booking) insurance and providing definitive bonds
or guarantees (in lieu of the bid bond). In some cases, the financial model
must be audited prior to contract signature, while in other cases this may
be delayed until financial close (for those contracts that allow for arranging
finance after the contact signature). Section 11 explains these issues
further.
Taking into consideration those special features of a PPP tender process, the box
6.2 proposes a list of conditions to be met or areas of specific care when
preparing and conducting a tender process.
• The project should have a clear strategic direction and strong political
support.
• The procuring authority should establish a sufficiently resourced and
capable team that will be credible in the eyes of bidders.
• Good planning and program management practices should be
implemented throughout the process.
• The RFP, including submission requirements, should be carefully
drafted (see chapter 4) and should be consistent and clear.
• Appropriate relevant information should be provided to bidders through
pre-bid conferences and a data room (in addition to the RFP).
• The evaluation criteria should be as objective and clear as possible.
• The evaluation criteria should not be changed during the process.
• The qualification and evaluation work should be organized in advance
(including an internal manual for evaluation).
• The formal evaluation process should be conducted by an appropriate
expert team and managed properly (for example, decisions by the
procurement board should be clearly recorded with reasons given).
• Strong capabilities and resources should be available to manage last
minute interactions and potential challenges, as well as for evaluation
and qualification.
• The time for bid submission should be realistic.
• A realistic timeline should be set for award and contract signature
(including time for evaluation and award and for preparation for
signature).
10
3 Negotiation is a variation that may be present in any of these processes, and several proposals are
sometimes considered before a final proposal is requested in some processes.
11
At the other extreme of the spectrum of variations, there are various interaction
or dialogue processes. Any interactive process is very different to the standard
open tender process structure. The RFP is discussed or clarified through
interaction during the bid preparation stage, or there may even be dialogue to
define the contract solution through the dialogue stage (competitive dialogue in
the European Union [EU]). This type of process has the following stages or sub-
periods.
12
The main difference in terms of management and process between open tender
types of process and those involving a dialogue or structured interaction resides
in the dialogue or interaction phase. The other challenges of the tender in terms
of process and management are the same as in other procurement methods. In
this context, in all of them the authority will have to qualify and evaluate offers to
select the awardee and subsequently manage the contract signature process.
The subsequent contents of this chapter introduce issues regarding the
management of the bidding stage (sections 5 to 7), and specifically the
interactions in dialogue or interactive processes (section 8).
The rest of the chapter then explains the main actions to be undertaken by the
authority to handle the key milestones that are common for any tender type: the
process of evaluating and selecting the awardee, including negotiating with a
preferred bidder if the PPP framework allows for this (sections 9 to 11), and taking
the project through to a successful execution of the contract (section 12), and
financial close (section 13).
13
• The technical bid and construction contract will be delivered in a more risky
context than a traditional procurement. The “contractor” (here the private
partner) is assuming more significant risks regarding construction (both in
terms of costs and time). These will need to be meaningfully assessed and
managed by transferring them (or most of them) to the sub-contractor
(even if the construction contractor belongs to the very same company
group as the investor and prospective bidder);
• Financial or commercial feasibility is a particular dimension of the
practicality of a PPP route. It requires bidders to assess the feasibility of
the project in overall terms. The revenues projected in a user-pays project
or in a government-pays project must be sufficient to cover all costs and
recover investments. Bidders must also test whether the bid will be
bankable (the risk perception of the bank or lender may not necessarily be
the same as that of the bidder). The capital costs estimated by the bidder
(including debt and equity in terms of minimum target economic internal
rate of return [eIRR]) may not be in accord with the original assumptions
made by the government when the project was initially appraised and
structured. A bidder’s perception of risk and its value (in terms of risks
premiums) may also differ;
• Assuming that the project as structured, including any government
payments or support, is commercially feasible from a bidder’s perspective
(that is, there is some room for competition in terms of price), the bidder
needs time to optimize its cost structure: negotiating with
suppliers/contactors and refining the financial structure to optimize capital
costs;
• Usually the bid is submitted by a group of companies using a joint venture
or consortium approach. This requires complex agreements (shareholder
agreements) that demand time for negotiation and implementation in
advance of the offer;
• Bidders will usually require approval from their boards. Time must also be
allowed for this approval process;
14
Abastecimento de
Água Potável e Single-stage open
Brazil Water/wastewater 33
Esgotamento tender
Sanitário (Sumaré)
15
Two-stage tender
Ravenhall Prison with short listing and
Australia Prison 147
Project interactive tender
process
Two-stage tender
Gautrain Rapid Rail with short listing and
South Africa Rail 180
Link interactive tender
process
16
4Under a two-stage open tender process, the initial invitation is only for the submission of qualifications
which are assessed to confirm the list of candidates that will be invited to tender.
5 Contract value is usually the volume of capital expenditures (Capex) estimated by the procuring
authority, or sometimes refers to the total amount of payments to be made by the procuring authority if
the bid equals the ceiling on payments.
17
The procuring authority should ensure that it targets potential bidders that
are likely to be interested in the project and capable of delivering it. A range
of communication paths may be considered, including:
18
6 Note that in some two-stage processes, if allowed by the procurement rules, it may be appropriate to
only provide a response to the bidder who asked the question, as the question and response may relate
specifically to that bidder’s proposal and may be irrelevant to other bidders. Where this option is allowed,
great care must be taken in its application to ensure that a response provided to only one bidder does not
give that bidder an unfair advantage.
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7. Qualification Matters
In a one-stage process with open tender, qualifications are presented at the
same time as the offer. The procuring authority must first assess qualifications
before evaluating the bids. Separating these two steps sequentially is generally
regarded as good practice, and some jurisdictions regulate the process in this
way through their legal framework to protect transparency.
In a two-stage open tender (pre-qualification), or in interactive or dialogue
processes, qualification is done in advance of inviting the candidates to prepare
and submit the bid (or to participate in a dialogue or interaction).
In two-stage processes, an issue can arise if there is a change in the
composition of a bidding consortium between pre-qualification and the
submission of bids. The RFQ should specify whether this is allowed, in what
circumstances, and what consequences may follow. Some flexibility in
consortium membership can be desirable to enable a pre-qualified consortium
to bring in additional organizations that can strengthen its bid. However, a
consortium should not be allowed to continue in the process if its composition
changes such that it would no longer be capable of meeting the pre-qualification
requirements. The procuring authority should minimize the likelihood of
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• The essence of the assessment procedure is the RFP (or RFQ, if using
a two-stage process);
• Qualifications must be assessed in accordance with the criteria
announced and described in the RFP (or in the RFQ in a two-stage
process). Deviations from the criteria and methodology laid out in the
RFP are not consistent with the transparency needed and will likely
result in challenges to the outcome (see chapter 4 for a description of
typical qualification criteria);
• The team whose task it is to assess the qualifications must be sufficiently
skilled in the respective areas involved; and
• A manual or a set of established procedures used to assess the
qualifications is important to further document the process and methods
that are to be applied. This is especially the case, for consistency
purposes, when more than one person will assess any particular criteria
or sub-criteria. However, any manual that is developed should remain
consistent with all the criteria described in the RFP (or the RFQ).
22
7 Australia’s National PPP Guidelines (2011), Volume 2: Practitioners’ Guide, appendix E provides
extensive information on management issues in interactive tender processes. The joint United Kingdom’s
(UK’s) Office of Government Commerce/HM Treasury Guidance on Competitive Dialogue (2008) also
provides infromation on key issues during the dialogue stage in its section 5.3.
8 How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets, PPIAF,
World Bank – Farquharson, Torres de Mästle, and Yescombe, with Encinas (2011) includes an interesting
case study that explains the process followed in the tender of a hospital in South Africa (see page 126).
The tender process was based on a two-stage process with significant interaction and dialogue (including
one-on-one meetings) with the short-listed consortia before bid submission. The case study illustrates,
among other things, how sound governance of the tender process is essential, including a structured
evaluation process leveraging separate evaluation teams and internal and external scrutiny that ensured
a high level of transparency.
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9. Evaluation of Proposals
As with assessment of qualifications, proposals must be evaluated in
accordance with the criteria set out in the RFP. In this sense, there will be an
important difference in terms of process between price-only evaluation and a
combination of quality and price criteria. The latter is clearly more complex, and
the discussion below focuses on this approach.
The information contained in this section is applicable to any process type,
including dialogue and interaction processes.
As noted in section 3, evaluating PPP bids is a more complex matter than
evaluating conventional contracts, and the risks of non-compliant bids and of
challenges to the process are accentuated in PPPs. The main corrective factors
for these risks are having clear rules for evaluation and robust evaluation
decision-making processes. It is paramount to engage highly capable and
experienced resources to carry these out.
It is also good practice to set up a practical guide or evaluation manual for the
project to ensure consistency among different reviewers/evaluators, including
24
9Further reading on evaluation matters may be found in Infrastructure Australia (2011) National Public
Private Partnership Guidelines. A discussion on the bid evaluation process can be found in these
guidelines in section 12 of the Volume 2 (Practitioners’ Guide).
10 As introduced in chapter 4, it is not uncommon and may be considered good practice to establish a
floor for technnical scoring so that no offer with less than x points in technical evaluation (or y points as
26
minimum in some specific sub-criteria) will be qualified. Rather, it will be rejected (and the price or
economic offer will also be rejected).
11For instance, the requirement to submit a financial offer with the bid under reasonable terms for the
commitment and availability of finance.
12 “Temerity” refers to an offer made on terms that might be considered reckless, in the hope of winning
the project and subsequently being able to negotiate a more favorable outcome. In some jurisdictions (
for example, in Spain), it is customary to establish a threshold of temerity in relative terms. For example,
any offer that is below the average bid by more than 15 percent will be considered too aggressive for the
purpose of evaluation. According to Spanish legislation, the authority may give the bidder the opportunity
to explain and argue the rationale of that offer, and additional security may be required by the authority to
ensure the availability of funds.
27
Many countries conduct a staged evaluation process, as described in the main text,
sequentially performing the technical/qualitative evaluation and then the
financial/economic evaluation. This is a well-tested approach and may be particularly
appropriate if the government is seeking an acceptable technical solution at a good
price, and there are significant concerns about corruption or undue influence in the
process.
However, some countries (generally more developed countries with significant PPP
experience) have processes in which bidders can offer different (innovative)
solutions. These may require amendments to the contract that will be specific to each
bidder, or they may create different risk or cost exposures for the government. In such
cases, a separate decision cannot be made on price, but there must be a parallel or
“streamed” technical/qualitative and financial/economic evaluation because there
may need to be discussion between the technical and financial evaluation teams to
ensure the implications of the innovative solutions are properly understood by each
team and the evaluation is conducted on a consistent basis.
For example, it would be inappropriate for the technical evaluation team to score a
proposal on the assumption that the government will accept an offer of a higher level
of service from that bidder, but for the financial evaluation team to assess the price
on the basis that the government will only pay for the base level of service assumed
in the RFP. In this evaluation process, the evaluation teams may talk to one another
about elements of the bidders’ proposals. However, they should respect the strict
separation of the actual evaluation against the evaluation criteria — that is, a team
evaluating one of the criteria should not discuss its evaluation of bids against that
criteria with another team not involved in evaluating that criteria.
• The RFP requirements or draft contract may not have been clear, but
this may not have been identified during the RFP clarification process.
This may arise if a bidder thinks the RFP is clear but they have
interpreted it differently from government’s intention;
• The RFP requirements or draft contract may not have been acceptable
to bidders and their lenders (in particular, with respect to the proposed
risk allocation);
• The wording in the draft contract may have assumed that bidders would
meet the RFP requirements in a particular way, but the preferred bidder
may have chosen a different solution that nevertheless meets the RFP
requirements. For example, the RFP may allow the equity to be invested
in the form of share capital or subordinated debt, but the contract may
have been drafted on the assumption that the equity only consists of
share capital. Therefore, some negotiation may be required to ensure
relevant clauses in the contract appropriately apply to subordinated debt;
and
• The bidder’s proposal may have been sufficiently clear for the purposes
of the evaluation, but some details that were not material to the
evaluation may be unclear or poorly worded, and the government may
wish to negotiate clearer, more precise wording.
In each of these situations, negotiation can enable the parties to reach a
mutually agreeable position. It also reduces the risk of issues arising later in the
life of the project due to a lack of clarity in the documentation or a lack of
consistency between the bidder’s proposal and the contract. However,
negotiating at any stage can be challenging, and negotiation creates a risk of
reducing the transparency of the bid process.
The challenge can be even greater once a preferred bidder has been identified,
as the preferred bidder will consider itself to be in a strong position in the
negotiations, even if a reserve bidder is maintained as a fallback option. For
this reason, care should be taken during the structuring of the tender and the
contract to ensure that the documents are clear and the risk allocation will be
acceptable to bidders – see chapter 5.
If negotiations are required, and are allowed under the applicable framework,
the negotiation process must be carefully managed to ensure that legitimate
issues are resolved without the preferred bidder gaining a better position at the
expense of the government.
Due to the risks associated with negotiation, some governments do not allow
negotiation of the terms of the contract at any stage of the process (although
room for negotiation on bidders’ proposals may remain).
Once any negotiations have been completed, it is good practice to require the
preferred bidder to resubmit its proposal, amended to reflect the negotiations.
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11. Award
After the tender is evaluated according to the relevant criteria provided in the
RFP and any negotiations are satisfactorily completed, the award decision is
made by the relevant authority, usually based on the recommendation made by
the evaluation team.
In some countries/jurisdictions, this does not imply a definitive selection
because endorsement of the decision may be required at a higher level (for
example, by the cabinet). Alternatively, bidders may challenge the evaluation
decision within a certain time limit, which is known as a “standstill period” (see
box 6.5). A standstill period, with challenges prohibited after that period expires,
can be beneficial to ensure that any challenges to the process are made
promptly and not strategically deferred by the losing bidders.
If any necessary endorsement has been received and there are no appeals, the
award decision will become definitive and, in some countries, will be published
in the respective official journal (although this is not a universal practice). After
official or definitive awarding, the winning bidder (awardee) will be called for the
contract signing.
In some jurisdictions (but uncommonly), it may be necessary at this point to
obtain the authorization or validation of a general attorney and/or of a general
auditor, or it may even be necessary to obtain a ratification by the legislature.
If there is a delay in the awarding process beyond the timelines provided in the
RFP, the procuring authority should consider whether the winning bidder will
still be capable of meeting the contractual milestones and the commitments
made in its bid. It may be necessary to agree to revised dates as a result of the
delay — although if the changes are substantial, this may provide a basis for
other bidders to challenge the award decision. The best means to mitigate this
risk is to establish realistic timelines for the award process from the outset, and
to ensure that decision-makers understand the risks associated with delays.
“An aggrieved bidder can bring an action to have the PPP contract rendered
ineffective if the authority contravened EU procurement rules in a serious
manner. Previously, the sole remedy that an aggrieved bidder could seek
was to be awarded monetary compensation, but nowadays an aggrieved
bidder could seek cancellation of the PPP contract. How the various rights
and obligations of the parties will be determined in this case is left to national
law.”
13See How to Prepare, Procure and Deliver PPP Projects (EPEC 2012). http://www.eib.org/epec/g2g/iii-
procurement/31/314/index.htm
31
14 For further information on sole bidder situations, see Competitive Dialogue in 2008. OGC/HMT Joint
Guidance on Using the Procedure (UK Office of Gov. Commerce, 2008) – BOX 5.7. “Market failure and
single bidder situations”.
32
34
No matter when financial close occurs, that milestone will have implications for
the authority. In all cases, the authority will have to validate the financial
agreements to check that they do not contravene the provisions of the contracts
or represent any direct risk or additional responsibility not considered in the
contract. It is common for the authority (especial in emerging markets) to
acknowledge the contract and specifically validate the lender´s rights as agreed
and described in the contract (for example, the lender’s rights to step-in and
cure defaults).
The authority may also make direct contractual representations to the lenders
(through direct agreements or direct letters). These are not necessarily direct
guarantees in favor of the lenders15, but nevertheless these representations
give the lenders comfort that they will be able to exercise their rights in respect
of the project should the need arise.
During this period, there is a degree of alignment between the authority and the
private partner. It is generally in both parties’ interests to promptly achieve
financial close so that this finance is available for the project to proceed.
Another typical issue that may have implications for the authority during the
financial close period is the use of the base interest rate risk-sharing
mechanisms (see chapter Appendix to chapter 5). In some projects, the
15 Direct guarantees in favor of lenders may also be established in the contract; this may be the case in
both emerging economies and developed economies, or it may be that the government is a financial
partner of the Special Purpose Company (SPC). Both situations make clear the need for and relevance
of proper management processes, and have direct implications of the financial close for the authority.
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References
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It should be noted that the activities carried out by the private party, described
in this section, may be the same if the procurement is for a brownfield PPP
project, or if the project is a privatization or secondary market transaction. On
a related note, many of the activities may also be carried out as part of certain
non-PPP procurements (see chapter 1), such as Design-Build-Operate (DBO),
or Design-Build-Finance-Operate-Manage (DBFOM) management contracts
and concession/lease arrangements. However, consideration of these types of
procurements, and the specific activities required of the private party to
implement them, is outside the scope of this PPP Guide.
In this section, an account is given of the various stages of the private party’s
PPP pathway, highlighting some of the key activities that it will carry out at each
stage.
This section describes the factors that influence the private party’s decision to
invest in a particular country and, specifically, to respond to the procuring
authority’s Request for Proposal (RFP). It sets out how the private party puts
its PPP project tender response together. This is a process that includes
forming a bidding consortium and appointing advisors, right through to
developing its commercial strategy and detailed technical, financial and legal
solutions for the PPP project.
PPP projects involve the planning, design, construction, and provision of a PPP
project asset together with the provision of associated services, such as the
operation and maintenance of that asset. They also require a significant amount
of financial support. Achieving this requires a series of agreements to be
completed.
40
Attention is also focused on the type of finance the private party can obtain for
the PPP project, the lending requirements that must be met, and the stage at
which fully committed funding is provided.
A description of the private party’s role at the concluding stages of the PPP
project’s procurement, commercial close, and financial close is provided.
Additionally, a note of the key activities that the private party needs to carry out
in order to form the SPV is included in this section.
An overview of this section and its key learning points is set out below.
If the PPP project screening is sound, the private party will decide to participate
in the bid. Resources should be spent only when the decision to participate in
the bid is positive.
The Consortium Agreement will anticipate the basic terms of the future project
and project company governance, including the decision-making process.
One of the first matters the consortium has to deal with is the appointment of
external advisors. External advisors provide general support, expertise, and
resources to prepare tender documents on time. The areas covered during the
tender stage are technical, legal, and financial in nature.
Determining the Corporate Structure of the SPV and the Structure and
Type of Contracts Entered into by the Private Party
The SPV is the vehicle that implements the PPP project. It is comprised of
shareholders, and will adopt a limited recourse structure with project obligations
being passed through to the construction and operation and maintenance
(O&M) contractors. These contractors may be members of the consortium if it
is structured in such a way that they will be both future equity shareholders and
contractors.
The SPV needs to ensure that all its project agreement obligations are made
completely known to the key PPP project contractors.
The technical proposal will have to be endorsed by the construction and O&M
contractors and the sponsors. Equally, the financial proposal, and notably the
financial strategy and the risk/award assessment will need to be endorsed by
the sponsors. Similarly, the legal details will need to be endorsed by the
sponsors.
Preparing a bid does not necessarily mean making a decision to invest. The
decision to respond to the RFP is made only if some conditions/targets are met.
Technical Issues
The technical process will provide two main outputs: the technical bid package
and the assessment of costs, specifically capital expenditure (Capex),
operating expenditure (Opex), and life-cycle cost (LCC). These technical
outputs will be taken into account in building the financial model/outputs and
the price negotiations for construction and O&M.
Financial Issues
The financial team will identify and help obtain the best sources of project
finance, such as debt and equity. The financial model reflects the financial
structure of the consortium’s proposal. It will also be used as a tool to help refine
the financial impact of any changes to the consortium’s proposal that might be
agreed during negotiations with the procuring authority and/or the PPP project
funders.
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The legal team will review the procuring authority’s documentation, and it will
prepare the legal package to be submitted to the sponsors (for their
endorsement) and the procuring authority as part of the tender response. It will
draft and agree the heads of terms (HoT) relating to the construction and O&M
contracts, as well as the drafting of the contracts themselves. The legal team
will also draft the shareholders’ agreement and the finance legal documents. It
will also ensure a complete pass through of the consortium’s obligations into
the construction and O&M contracts.
Fundraising
The credit/loan agreement is the key financing document. Meeting the required
financial ratios, such as loan life cover ratio and annual debt service cover ratio,
help to ensure the financial robustness of the project.
When all of the PPP project’s commercial issues are agreed and solved then it
has achieved commercial close. Financial close occurs when the PPP project
funding becomes available. Normally, commercial close and financial close
happen simultaneously or in quick succession. See figure 6A:1.
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45
The level of PPP activity in a market will be influential too. A large number of
existing PPP participants may reveal there is too much competition for a private
party to deliver a winning bid. Too few PPP participants may indicate a lack of
market liquidity. However, on occasion, a private party may simply form a view
that a specific PPP project represents a good business opportunity and this will
mean that it decides to become involved.
Each private party will have a different perspective as to what is the right
investment for it. Some will be looking for a long-term investment, and a PPP
project with a long 20–30 year term will be highly attractive. Others, such as the
construction contractor may prefer to invest for the short-term only, managing
the preliminary PPP project stages (design and construction) and exiting after
the PPP project asset has been constructed. Some private parties will be O&M
providers, and for these parties the prospect of a PPP project providing
significant long-term operating revenues over a 20–30 year term is attractive.
Normally, at the time a private party takes a decision to invest in a PPP project,
it will also have an idea of how long it will remain committed to the PPP project
and when it will exit.
The most attractive markets for a private party are ones that offer predictable
and strong growth potential with high or adequate levels of return, and those
that provide business-friendly environments within which to work. The
attractiveness of any market, however, may be diminished by the risks present
in it. As seen later in this section, a private party needs to ensure that any
country or market risk, such as political risk or currency fluctuation risk, can be
controlled. For example, a change in a country’s government might herald in
the introduction of a new political policy that prohibits PPP projects and results
in current projects being terminated.
A private party goes through a structured process to identify where in the world
and in what sector it wants to invest. Identifying the best investment
opportunities involves several considerations.
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16 For further reading on the effect of regulation, see Sirtaine, Pinglo, Guasch, Foster, How Profitable are
Infrastructure Concessions in Latin America? Empirical Evidence and Regulatory Implications, 2005.
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The projects pipeline will be reviewed and updated regularly by the private
party’s business development and investment teams to check on how it is being
implemented. There may be a number of PPP projects that the private party is
provisionally interested in pursuing. However, its decision to go ahead with a
specific project is taken after it has received and considered a large amount of
information.
A key stage in the private party’s PPP project selection process is the point at
which a procuring authority announces its PPP project to the market. Such an
announcement may be through formal channels (such as an official
announcement in the Official Journal of the European Union), or it may be made
informally through direct approaches to interested parties or by advertising in
newspapers, trade journals, or on the procuring authority’s website.
Much more information about the PPP project will normally become available
when the PPP project is announced. The additional information that is made
available will assist a private party in carrying out its PPP project screening.
Screening the PPP project is another key stage in the private party’s selection
process; the information a procuring authority makes available will be highly
influential in helping a private party to conduct its PPP project screening.
FIGURE 6A.3: Project Evaluation Memo (PEM) and Preliminary Due Diligence
Risk Check
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49
A private party needs to be mindful of the costs associated with bidding for a
PPP project; this assessment is a key element of the PPP project screening.
The costs of bidding need to be proportionate to the financial/investment
advantage that the PPP project will deliver to the private party. The PPP project
screening will therefore include an assessment of bid costs: obtaining project
information from the procuring authority; attending meetings in an overseas
jurisdiction; instructing local advisers; and using personnel to prepare the bid.
The private party will also consider the cost of any physical due diligence it is
required to do before submitting its bid. For example, there may be a
requirement to carry out a geo-technical survey. If this is expensive to do, then
it may act as a barrier to entry; a private party may not want to incur the cost of
an expensive survey with no guarantee that its bid for a PPP project will be
accepted. As such, when a procuring authority is considering its tender
requirements, it is useful for it to consider the costs of meeting these
requirements and how such costs may influence whether a private party bids
or does not bid on a PPP project.
Assuming that the PPP project screening is positive, the private party will begin
its search for partners and advisors to work with it. When the private party has
found complementary partners, it will form a bidding consortium with them (see
section 6.4). At this stage, each of the key private party partners in the
consortium will normally be referred to as sponsors.
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Section 6.7 below sets out all the key activities that need to be completed by
the consortium in order for a RFP response to be completed and submitted.
Making the investment decision about whether to submit a RFP requires each
individual member of the consortium (each sponsor, see section 6.4.1), and the
consortium as a whole to acquire a deeper understanding of the main risks
associated with the PPP project. Specifically, there needs to be consideration
of how such risks could be allocated and managed by consortium members if
they decide to submit a RFP17. Accordingly, each consortium member will carry
out a more in-depth assessment of the PPP project risks because: (i) each
sponsor will need to assess whether its organization should make a decision to
proceed with the PPP project; and (ii) all sponsors, acting together as the
consortium, will need to take a collective consortium decision about whether to
proceed with responding to the RFP.
Both the sponsors and the consortium will require a full analysis of the
commercial risks associated with the procuring authority’s PPP project,
including an appraisal of any threats to the forecasted project revenues.
Additionally, consideration will be given to any regional or country risks.
Local intelligence about PPP project specific issues, such as the stability of the
local environment where the PPP project will be implemented and the
preparedness of the procuring authority to run its PPP project tender, will also
be important to know. These factors will influence the sponsors’ and the
consortium’s decisions. Politically unstable environments (for example, where
are elections due) create a risk that a new government might not support the
procuring authority in its PPP project proposal. This will cause concern.
Similarly, if the procuring authority lacks sufficient personnel or is not
adequately prepared and organized to run its PPP project tender, then this too
will be of concern to sponsors and the consortium.
Concern arises because if any of the risks materialize, the successful operation
of the procuring authority’s PPP project tender could be jeopardized at any
stage and, specifically, before the final award of the PPP project. From the
consortium’s and each individual sponsor’s perspective, neither will want to
expend its time, money, and energy bidding for the PPP project if there is a
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An additional area of concern for sponsors and the consortium is the PPP
project’s procurement timetable. Sponsors and the consortium will require an
assurance that the suggested procuring authority’s procurement timetable is
achievable. Project sponsors and the consortium will dislike taking part in a
bidding process that does not proceed according to a robust and appropriate
timetable. Frequent timetable changes will erode their confidence in the PPP
project unless there are objectively good reasons for changes, or the changes
are requested by a private party.
This analysis will normally be carried out using the sponsors’ in-house
resources, typically their business development team or their investment team.
When carrying out this exercise it is important that the sponsors have broad
experience in identifying and managing risks similar to those likely to emerge
in the PPP project. In this context, the sponsors’ previous experience will mean
that they will know what points/issues are of concern when carrying out the
analysis. In some instances, the sponsors might also hire external/independent
experts to help with this task.
On completion of its analysis, each sponsor will let its fellow sponsors know of
its decision to participate and continue its involvement in the bidding process.
These decisions will normally be discussed during regular consortium meetings
known as steering group meetings – see section 6.4.3. Further, the decision of
each sponsor will be taken into account when the consortium makes its decision
on whether to submit a RFP response. See figure 6A.4.
18There is evidence that lack of preparedness may facilitate opportunistic negotiations over aspects of
the PPP project. See Engel, Fischer and Galetovic, Public-Private Partnerships: When and How, 2000.
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The consortium that responds to the procuring authority’s RFP will typically
include the following key private partners, all of whom may be required to bid
together on an exclusive basis.
• The sponsor is the party (or parties) who will assume a leading role in
the PPP project during the investment life cycle. However, it should be
noted that some project sponsors will not want to have an active role, so
they will just be equity investors.
Sponsors create the consortium for the sole purpose of bidding for the
PPP project. As will be seen below, it is the consortium that will
eventually become the SPV implementing the PPP project. The
sponsors (or their parent companies) often have to provide guarantees
or enter into management or service agreements to cover certain
liabilities or risks.
During the PPP project tender stage, the contractor will provide the main
technical and quality outputs of the proposal as well as the
construction/lump sum price (Capex). When awarded the PPP project,
the construction partners may incorporate an ad hoc vehicle called a
Cooperative Joint Venture (CJV) or Engineering, Procurement and
Construction Consortium (EPCC).
It should be noted that the role and status of the lender is different to that
assumed by the other consortium members. If fully committed finance is
required at the RFP tender submission, then the lender will be a “tied-in”
member of the consortium. It will normally provide the PPP project funding
according to the terms of the RFP tender submission, subject to all parties
agreeing to certain changes to the funding solution as required.
If, however, fully committed finance is not required at the RFP tender
submission stage, then the lender will be more loosely associated with the
consortium. It will provide indicative financing terms to the consortium and it will
demonstrate its intention to support the consortium. However, it will not be until
much later on in the procurement, perhaps after commercial close, that it will
confirm its funding terms and so become a full member of the consortium by
acting as the consortium’s lender.
The consortium may also include members of the contractor’s and operator’s
supply chain, such as key sub-contractors and facilities management providers
(FM providers). This might happen if supply chain members are providing
specialist support and there is a need to “tie-in” their involvement with the
consortium, thus avoiding them working with a competitor. See figure 6A.5.
19 The debt arranger will usually provide a part of the loan funds. Sometimes it may be committed to
provide the whole amount (underwriting) so as to allocate part of the funds among other banks
(syndication).
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Once the consortium is formed, the next requirement is for the sponsors to put
suitable bidding arrangements in place. These will normally take the form of a
Letter of Intent or Memorandum of Understanding that will be entered into by
the sponsors, which will set out their intention to bid together, normally on an
exclusive basis. These agreements may not be binding. However, a more
formal and binding agreement, known as a “consortium agreement”, may be
agreed to by the sponsors.
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During the bidding process it will, therefore, be necessary to put into practice
effective governance mechanisms to determine how best to run the RFP
response preparation and to ensure that all members of the consortium are fully
accountable. The most common way of doing so is by establishing a steering
committee.
The steering committee will support the bid manager (see section 6.7 for a list
of the bid manager’s responsibilities) in its role of ensuring that the preparation
and submission of the RFP response is carried out properly and always meets
deadlines. It will also support the bid management team, including those
individuals who are responsible for taking key decisions about the content and
progress of the RFP response. In practice, this will mean that the bid
manager/management team will provide regular reports to the steering
committee on arising PPP project issues. The steering committee will consider
these and make decisions on the basis of the received reports.
The cornerstones of good project governance are the steering committee, the
sponsors, and the bid manager and team. See figure 6A.7.
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• The SC follows a formal framework that defines its role in relation to the
bid management and the governing bodies of the sponsors/parent
companies;
• SC members must be mandated/authorized to take the necessary
decisions by their respective sponsors/parent companies;
• The SC defines and promotes the principles and objectives of the
bidding team;
• The SC agrees to the bid strategy after input from the sponsors;
• The sponsors appoint the SC members depending on their number of
shares;
• The number of SC members should be appropriate (no less than 4 and
no more than 10);
• A chairperson and a secretary should be appointed;
• The SC empowers and provides direction to the bid manager in order to
define acceptable risk profile/thresholds and maximize the bidding
team’s options; and
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Prior to submitting the bid, each individual sponsor must obtain approval from
its internal investment committee. Since each sponsor normally has different
procedures and requirements (that is, different information may have to be
provided, there may be different dates fixed for internal committees meetings,
and so on), the bidding team must be prepared to provide project information
to each of the sponsors well in advance of the procuring authority’s tender
submission date.
Additionally, the consortium as a whole must obtain the approval of the steering
committee to submit its bid because the decision to submit a final RFP response
constitutes a formal decision to invest. Consequently, in order to submit a RFP
response, all members of the consortium must be fully aligned and agree on its
terms and conditions. If one sponsor cannot agree on an issue relating to the
RFP response, meaning that there is no general agreement among sponsors,
then it will be difficult for the consortium’s response to be submitted. In such a
situation, it will be the steering committee that will try to broker an agreement.
Once this is achieved, the RFP response can be submitted.
One of the most important governance challenges the steering committee faces
is the need to deal with and manage disputes among the sponsors. Some
sponsors might not be 100 percent aligned with each other, or they might be
unable to adopt a consistent approach to the PPP project risks. Both situations
would undermine the consortium’s ability to prepare a competitive bid and
deliver Value for Money. To deal with key decision-making and conflicts of
interest, it is normal to have in place the following procedures and mechanisms:
External advisers will work alongside the consortium’s members to support and
assist them in their review and assessment of the procuring authority’s PPP
project, and in particular, the review and assessment of the documentation
issued by the procuring authority.
External advisers will provide specialist technical, legal, and financial advice,
as well as general support to enable timely preparation of tender documents
and deliverables. Some advisers, although not all, may provide additional bid
planning and management services.
Making significant decisions for and on behalf of the consortium is, as a rule,
outside the advisers’ scope of work. However, the external advisers, in their
supporting role, will ordinarily act as the ‘agent’ of the consortium. External
advisers used by the consortium will attend meetings called by the procuring
authority, and they may respond in writing to questions raised. However, they
do so in consultation with and after taking advice from the bid manager and
ultimately the consortium members. As such, their role is to act as the conduit
through which the consortium’s views will be expressed.
External advisers do not determine what these views are. Indeed, that is the
sole function of the consortium. However, by virtue of the advice provided by
the advisers to the consortium, the advisers can rightly be said to have helped
shape and influenced the consortium’s decisions. Occasionally, the consortium
may receive conflicting advice from advisers, and in such situations the bid
manager or the SC will act as the final arbiter and determine the way forward.
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FIGURE 6A.8: Bid Working Team: Areas of Responsibility and Main Activities.
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The consortium will be aware that it is advisable to start using expert advisers,
whether in-house or external, as soon as possible — and certainly by the time
a decision has been taken by the consortium to go ahead with a PPP project.
If not appointed early, there is a risk that the best advisers will not be available
and might be advising competitors.
In some instances, and depending on the complexity of the PPP project, the
consortium may chose a large international multidisciplinary consultancy firm
to provide all (or the majority) of the required advisory services at once.
Normally, however, the consortium will appoint several specialized advisers for
particular tasks, such as advising on just technical or financial aspects of the
project.
Typically, the consortium will try to secure the best international external
advisers. The importance of using local advisers should not be underestimated,
and it is common for the international advisers to help select suitable local
advisers.
The key considerations to take into account when the consortium appoints
advisers can be summarized as follows;
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This PPP Guide assumes a project financing approach. As such, normally this
means the consortium will create a special purpose company, known as a
Special Purpose Vehicle, in order to implement the PPP project. The
consortium would not normally adopt an unincorporated joint venture or a
partnership type structure.
The financing of the PPP project through project financing means that the
sponsors will require protection from the PPP project risks. They will require a
limited recourse structure that involves the creation of a SPV. All or most of the
PPP project risks that are set out in the project agreement will be assumed by
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Addressing structure, and taking a decision in relation to it, will be made in the
full knowledge that it is the consortium that will be reformed as the project
vehicle, and that the sponsors will become the shareholders in that project
vehicle.
The SPV will normally be established just before the project agreement is
entered into with the procuring authority, that is, at financial close. The
members of the consortium will normally be the shareholders in the SPV,
together with additional shareholders, such as investors.20 However, not all
consortium members will want to be SPV shareholders. For example, a
construction contractor sponsor may decide that it does not want to be a SPV
shareholder. Instead, it will decide to be part of the proposal as a nominee
contractor.21 It may wish to focus all its attention on construction activities,
rather than becoming involved in all aspects of the PPP project’s
implementation as members of the SPV are expected to do.
Each member of the consortium (with the potential exception of some nominee
contractors) will have to be committed to participate in the future SPV as a
shareholder, taking an equity stake in it. Shareholders will hold equity in the
proportions defined and agreed to in the shareholders’ agreement. The size of
an equity holding can vary from very small (pin-point equity) to large. Normally
it is the primary project sponsors who collectively hold the largest amounts of
equity.
The arrangements set out in the Consortium Agreement (see section 6.4.2) will
be reflected in the SPV’s constitution and in project contracts entered into by
the private party. The Consortium’s arrangements relating to working methods,
the rights and responsibilities of sponsors, and how PPP project risks and
rewards will be shared between sponsors will all be matters that are addressed
in the documents entered into to establish the SPV and the other PPP project
contracts.
20Occasionally the procuring authority may, because of legal requirements, be a member of the SPV. In
most cases, the procuring authority plays a nominal/minority shareholder role with a limited role in SPV
decision-making. The SPV’s constitution will reflect the arrangement.
21Noting that in some tender processes it may be requested that the party that provides the construction
or the O&M experience be part of the SPV as a shareholder with a minimum equity involvement.
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Often, there will be a direct link between one of the SPV’s shareholders and the
construction and/or O&M contractors. Where there is such a link, there needs
to be careful management of the relationship because there is a potential
conflict of interest between the interests of the SPV shareholder and the linked
contractor. In practice, this might mean that one of the SPV’s shareholders may
be unable to agree with the remaining SPV shareholders to accept a term in
the project agreement on the basis that it knows its linked contractor will not be
able to meet the obligation.
The SPV will be set up with one purpose only — to design, finance, build, and
operate the project. The SPV is arguably the main player in the PPP project
because of the number of activities it undertakes.
The SPV enters into the project agreement, obtains funding from investors, and
contracts with the construction and O&M contractors. All these activities
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In a small number of PPP projects, the procuring authority has been a member
of the SPV. This practice is not common, but when it happens there will be
differences in how the SPV is set up and operates; for example, the private
party may have a different type of shares and the process for dealing with
disputes may involve recourse to a governmental body for a decision.
Typically during the initial stages of responding to the RFP, senior staff from
one of the sponsors will assume the bid manager’s function on a temporary
basis until a permanent appointment is put in place. Likewise, one of the
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For large and complex PPP projects that have been identified through the
sponsors’ due diligence, and which are strategic targets for them, it is likely that
a bid manager will be put in place before a PPP project has been officially
launched. The role of this bid manager will be to monitor the development of
the target PPP project for two reasons: to identify when it might be launched
into the market, and to liaise with the procuring authority in order to build a good
working relationship early on.
Carrying out these activities will help sponsors and/or the consortium prepare
in advance for the large and complex PPP project. This will be sound
commercial practice, as time will be limited once the RFP is launched; any work
that can be done beforehand will be useful.
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As described in figure 6A.10, when preparing the RFP response there are
generally three working teams: the legal, technical, and financial teams. Each
team will have a team leader and a supporting or working team to provide
assistance. In some cases, consortium members may have additional advisers
working for each of them. At the beginning of the RFP response preparation,
the working teams would normally be made up of internal personnel (the input
from external advisers is not very significant at this stage).
As noted, once there is certainty about the tender process and the RFP details,
then external resources and advisers are used. These external resources will
supplement the existing internal resources provided by the sponsors. Normally
when the bidding process is ongoing, there will be key milestones to be met
with their associated deliverables, such as the completion of feasibility studies
and assessments.
From the sponsors’ perspective, using seconded staff will help to ensure
alignment with the sponsors’ corporate guidelines, although it is recognized that
the collective views of the consortium members will need to prevail.
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In some cases, the procuring authority might provide full PPP project designs
or construction requirements. In these circumstances, the private party will not
normally assume any risk relating to the accuracy of the provided requirements
— unless there is an opportunity to review the final design and to propose
design variations and changes of standards.
The main aim of the design process is to define the PPP project scope of work,
identify suitable metrics, and assess the costs. The former includes the
assessment of RFP technical and quality requirements, the assignment of
objectives among the technical team (who is responsible for what), and the
development of the conceptual design. The latter includes defining a Design
and Construction (D&C) schedule, a Bill of Quantities (BoQs), Key Performance
Indicators (KPIs), technical specifications, and a budget/cost for construction
(Capex).
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Similarly, in relation to the Operations Phase, the starting position is the RFP’s
output-based and performance-based specifications. These will be taken into
account in the project’s technical requirements (O&M Manuals). The technical
team will produce the long-term O&M plans, as well as an estimate of the
operational costs (Opex) and life-cycle costs (LCC) for the PPP project over the
duration of the project agreement.
The tension between construction and operational costs means that each of the
construction and O&M contractors’ approach to costs may conflict. As such, it
will be incumbent on the SC to manage this issue and to agree on an approach.
It will be crucial however to ensure that whole-life costs are kept to a minimum
without compromising quality and outputs. In doing so, benchmarking, cost
targeting, and value engineering methodologies must be used.
At the end of the technical process, there will be two main inputs: the technical
bid package and the assessments of costs associated with the PPP project
(costs adjusted to the risk assumed by each party). Subsequently, these
outputs will be taken into account to carry out the necessary financial analyses
and to build up the financial model/outputs. It is important to highlight that the
final (and binding) decisions with regard to Capex, Opex and LCC will be
adopted very close to, or just before, bidding submission. Therefore, the
sponsors, steering committee, and the bidding team must be prepared to make
fast decisions under very tight schedules.
The technical solution will drive the PPP project, and consequently it will form
a key part of the project agreement.
Note: D&B= Design and Build; EPCC= Engineering, Procurement and Construction
Consortium; PCG=parent company guarantee.
The financial solution comprises the business case used by the private party to
approve its decisions to invest in the PPP project and to submit its bid. It will
set out the private party’s financial strategy and financial structure (the optimum
mix of debt and equity) for the PPP project.
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The most important function carried out by the consortium’s financial team is to
develop its financial model. Normally, the financial team will delegate the
preparation of it to a financial adviser and this financial adviser will carry out its
development under the supervision of the bid manager and/or the financial
team leader if there is one. See box 6A.2. The financial model is necessary to
help the consortium prepare its bid, as well as provide the procuring authority
with a method of assessing the robustness of the consortium’s RFP response.
In terms of assisting the consortium to prepare its bid, the construction of the
financial model serves a number of purposes.
First, it assists in the financial analysis of the PPP project, including the
payment mechanism, and it is used to assess the appropriateness of the PPP
project as an investment opportunity for the consortium. It does this by
identifying the relative project risk-return. A favorable assessment will help
inform the decision to submit or not submit an RFP response. Most importantly,
it will help determine the price and costs of the elements that make up the
private party’s RFP proposal.
For example, the financial team, or the financial advisers if instructed by the
financial team leader, will review the PPP project’s payment mechanism and
assess predicted project revenues. For “government-pays” projects, the SPV
will have made an assumption about the annual unitary charge it needs to
receive from the procuring authority in order to deliver the PPP project.
Payment to the SPV will, however, be dependent on the delivery of an expected
service at an expected level. A failure to deliver this will result in a deduction
22 In practice, the private party may use two financial models: one which is provided to the procuring
authority to support the calculation of its tender costs, and another which contains the ‘true’ cost of the
private party’s bid and which is for internal use only.
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The financial team will therefore be keen to test how aggressive the proposed
PPP project payment mechanism is. This allows them to estimate the likelihood
of deductions and the associated effect on the PPP project’s anticipated
revenues. It will do this by running scenarios and sensitivities using the financial
model.
Similarly, under “user-pays” projects where the SPV receives revenue from the
user of the PPP asset, for example road users paying tolls, the consortium’s
financial team will be involved in forecasting both use and revenues. These
forecasts will be used to assess if the anticipated use made of the PPP asset,
plus any constraints on toll levels imposed by the procuring authority, will
generate sufficient PPP project revenues. Again the financial model will be used
to test the scenarios and help inform decisions about the suitability of the PPP
project.
Second, the financial model is used as an aid to help the consortium assess
certain parts of its RFP response, as well as helping it to assess the overall
value and appropriateness of its proposal. For example, the financial model will
be used to help determine the fixed construction and O&M prices which are key
parts of the overall proposal submitted to the procuring authority. It does this by
enabling the consortium to test a variety of prices until it gets to an optimal total
price for the PPP project.
Third, the financial model is used to test financial structures and so help
determine the type of PPP project financing to be used by the consortium. For
example, the funders will specify a set range of sensitivities they want the
financial advisers to assess using the financial model. The financial model will
therefore run test scenarios, such as assuming a debt- or bond-financed
project.
It will also be able to test the impact of different debt terms or strategies (for
example, using a short-term or mini-term loan which is then refinanced after
construction) on the equity IRR. The benefit of being able to test different
scenarios is that it will reveal the advantages and disadvantages of each
approach. It will also help in the assessment of the degree of risk attached to
the proposed funding. Thus, the financial model will help the consortium decide
which funding solution to adopt.
The financial model will also be used to test proposals and counter proposals
that are considered during the procurement negotiations. The ability to run
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The financial model is a key component of a project and reflects the financial
basis upon which the PPP project has been agreed. It will be submitted to the
procuring authority as part of the response to the RFP. It provides a robust
assessment of the consortium’s costs and revenues inherent in its RFP
response. It is the information in the financial model that determines the amount
of the annual/ monthly payment that the SPV will need to receive in order to
meet all its cost liabilities. As a consequence, it will be fundamental for the
procuring authority’s financial advisers to fully understand the information
contained in it.
When each private party’s financial models are reviewed as part of the
competitive bidding process, it will reveal the genuine differences between
parties. It will also reveal how sensitive the RFP responses are to external
factors, such as interest rate changes. In order to ensure consistency when
making comparisons between parties’ bids, the procuring authority will make
certain assumptions regarding, for example, rates of interest and exchange
rates such that it will assume the rates are the same for each party’s bid.
While the financial model is produced by the consortium as part of its response
to the RFP, it will continue to be adjusted to reflect the financial consequences
of any PPP project changes agreed with the procuring authority during the
bidding process and throughout the term of the PPP project.
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6.7.2.2 Funders to the PPP Project and the Types of Funds they Provide
The financial structure of a PPP project, as in any project financing, requires
the provision of debt and equity. Debt and equity can be provided by a number
of entities, and they are normally provided at the point where the consortium
changes its status and incorporates into the SPV. It should be noted too that
the capital markets can be used to raise debt funding.
The sponsors will inject equity into the PPP project by becoming shareholders
in the SPV. They will have an equity stake in the SPV. Additionally, they may
provide subordinated debt, especially if this ensures a favorable treatment for
taxation purposes. International and domestic commercial banks will be the
usual funders to the PPP project unless a project bond structure is developed
(see below). Multilateral institutions such as the World Bank, through the
International Finance Company (IFC), the European Investment Bank (EIB),
the Asian Development Bank (ADB), the African Development Bank (AfDB),
and the European Bank for Reconstruction and Development (EBRD) may also
provide a source of project finance. Export credit agencies can also be a
funding source.
Other potential debt providers are debt funds, sovereign wealth funds, and
pension funds. Such providers may provide equity.23 The optimal mix of funding
sources will be dependent on their availability for a particular PPP project in a
23 In some countries, the equity providers may be allowed to transfer their shares early on (for example,
before the construction works start). In such a case, it is not uncommon for sponsors to pre-agree with an
investor on the disposal and transfer of a percentage of their equity shares to the investor. This means
that the equity investor would become an equity participant in the PPP project at the same time as financial
close. In other countries, however, all equity investors will have to be part of the bidding consortium from
the beginning in order to be allowed to invest in equity. If this is not the case, then the investor will only
be able to become an equity investor after the construction works are completed.
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The main features of the debt and equity elements of a PPP project’s financial
structure are set out below.
Debt
Most PPP projects receive debt financing from banks. Debt financing is
normally the cheapest form of project finance. Bank financing normally results
in a bank lending, for example, 70–90 percent of the monies required to fund
the PPP project, with the balance of 10–30 percent coming from equity
providers. The amount of debt provided to a PPP project as a percentage of its
total funding requirement is known as its gearing. In respect of the above
examples the gearing is 90–70 percent, and the split of debt and equity sources
of finance is represented by the ratio 90:10/80:20/70:30 respectively. It should
be noted that a PPP project’s gearing depends on the risks attached to the
specific PPP project, with certain project sectors receiving a lower proportion of
the debt than others. See figure 6A.13.
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This issue is addressed by the SPV taking out a financial product to pay a fixed
amount of interest for the funds borrowed. This financial product is known as
an interest rate swap and it will be purchased at financial close.
Debt repayment
Debt is repaid over the lifetime of a PPP project. The debt payment profile will
be set out in the funding agreements and will be determined at financial close.
Normally, debt will be fully paid off before the PPP project term ends, leaving a
period of time when all monies coming into the PPP project will be paid out to
the equity providers.
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The currency of capital outlays and the availability of funds from local markets
will also affect the cost of funding. The procuring authority, in a “government-
pays” project, may therefore find it beneficial to make payment in US dollars or
pounds sterling. These currencies are stable and payment in them will be
attractive to the SPV because it will help mitigate its currency risk.
Equity
Different types of investors can provide equity. These include infrastructure
funds, third party investors, and construction and O&M companies. Equity is
injected through the acquisition of share capital by individual shareholders.
When equity is provided, the equity provider will acquire shares in the SPV and
be classified as a shareholder.
Payment of equity, known as a dividend, normally occurs after the PPP project’s
debt (including subordinated debt24) has been paid, so it happens late in a PPP
project’s term. This means that it is most at risk. Should there be insufficient
PPP project revenues generated because of poor performance of a PPP
project, then it may not get paid out. As it is most at risk, and its payment is
deferred, the equity providers will expect a much higher return for the monies
they have lent. It is more expensive than debt.
24 The benefit of subordinated debt is that it can be repaid throughout the term of the project at an agreed
fixed rate of interest and provides the sponsors an additional return.
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The process of carrying out a bond issue varies from country to country. If a
bond is going to be issued, then it will be necessary to obtain local financial and
legal advice so that a robust commercial, financial, and legal due diligence can
be carried out on the project and the procurement process.
There are a number of stages that a bond issue goes through and these can
be summarized as follows.
• Pre-launch – deciding the type of bonds to issue, their value and terms;
• Road show – marketing the prospective bond launch so as to attract
investors who will buy the bonds; and
• Bond issue – issue of bonds to investors and the payment of funds.
Bond issues can take a short or a long period of time to put in place. It will
depend on the country where the bonds are being launched and the project
sector, as some sectors are more attractive than others.
The consortium’s legal team will be made up of internal and external legal
advisers. It will have a number of tasks to complete.
Some tasks will need to be completed as part of the PPP project screening
process. Activities required at this stage include carrying out an assessment of
the key legal requirements that are already established (for example, it may be
known early on that there is a requirement for the SPV to have the procuring
authority as a shareholder), and reviewing the legal impact of the allocation of
PPP project risks.
Other tasks will be completed as part of the bid preparation process. The legal
team will have to work with the consortium’s commercial, technical, and
financial teams to ensure that their different solutions that form part of the RFP
proposal can have legal effect. This means that there will need to be a review
and assessment of the legal issues arising out of the project agreement, and
the consortium will need to be advised of the conclusions.
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It may be possible to amend the project agreement (if this is permissible it will
be stated on the PPP project tender documentation), and if so then this is a
task that the legal team will carry out at this stage.
The legal team may also be required to carry out legal due diligence to assess
the legal powers of the procuring authority to carry out the PPP project
procurement. It may also carry out due diligence on the legal and regulatory
framework of the PPP project.
As part of the bid preparation process, the legal team will need to put together
the package of legal documents required for the RFP response. There are
different practices worldwide. Some countries require that all the key PPP
project contracts are drafted, agreed, and submitted as part of the legal
package. This would include the construction and O&M contracts, the
agreements that create the SPV, and in some cases the funding documents.
Other countries do not require such a detailed response and accept heads of
terms (a summary of the key terms to be included in the contracts – see below)
for each of the key contracts at the point when the RFP response is submitted.
When this happens, however, the legal team will be required to draft and agree
to all the key contracts at a later time during the period from the appointment of
the preferred bidder to financial close.
Some legal tasks will be ongoing ones and will be carried out throughout the
PPP project procurement. Such tasks include negotiating with the procuring
authority, the funders, and the consortium’s supply chain contractors.
In summary, the legal team will have the following key tasks.
1. To review the legal aspects of the RFP, including the project agreement,
to interact with the procuring authority and to prepare the package of
legal documents that form part of the consortium’s RFP response;
2. To prepare the agreements necessary to set up the SPV (its
constitutional documents); draft the heads of terms for the construction
and O&M contracts; and draft, negotiate, and finalize the construction
and O&M contracts; and
3. To review the funders’ finance documents and draft the associated legal
documents, to participate in the general commercial negotiations, and to
support the fundraising negotiations.
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The legal documents issued as part of the procuring authority’s RFP will include
the project agreement, the direct agreement, details of the required insurances,
and the bid bond and required security. On occasion, the procuring authority
may provide or specify the forms of security it requires to provide an assurance
that the SPV will deliver the PPP project as required. For example, the
procuring authority may require a Parent Company Guarantee from the
construction contractor that will guarantee the proper performance of the
construction works.
The consortium’s legal team will consider the legal documentation provided by
the procuring authority. The team will highlight the key obligations and
responsibilities the procuring authority requires the SPV to assume.
The legal team, together with the consortium’s advisers, will also advise on the
risk allocation inherent in the legal documentation and its acceptability. Using
this information, the consortium will be able to make an assessment of the
obligations and risks that can and cannot be accepted.
During the course of the PPP project procurement and/or during the bid
submission period, the consortium will, through its legal advisers, let the
procuring authority know its view of the terms of the legal documents. It will do
this in writing, at meetings, or through a combination of both throughout the
bidding process.
The key terms within the procuring authority’s provided documentation that the
legal advisers consider can be found in table 6A.1.
TABLE 6A.1: Key terms within the legal documents provided by the Authority
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In most cases, the formation of the SPV does not require the involvement of the
procuring authority. There may, on rare occasions however, be a requirement for the
procuring authority to be a shareholder in the SPV. It will also be prudent for the
procuring authority to carry out checks in some key areas. For example, some
procuring authorities require the SPV to be incorporated in the country where the PPP
project will be carried out; and some also apply restrictions on the age and
qualifications of those who can be appointed as SPV directors.
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• Heads of terms
The consortium’s legal team will initially assist in the preparation of heads of terms
(HOTs) for the construction and O&M contracts which are entered into between the
consortium and the construction and O&M contractors. Although not binding, the
HOTs will set out, in summary, the key commercial areas that the consortium and the
construction and O&M contractors expect to be included in their contracts. Specifically,
they will set out the degree of acceptance that can be given to the project agreement
obligations that will then need to be passed through to the contractors. The HOTs will
be developed throughout the bidding process, and will eventually form the basis of the
construction and O&M contracts that will also be prepared by the legal advisers.
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If a bespoke construction contract is used, such as a “design and build” (D&B), instead
of an international standard form, then the consortium’s legal advisers will draft it so
that it will mirror the form and content of the project agreement. It will also contain a
direct pass through of its obligations (see below). In addition, it will reflect the
commercial agreement between parties regarding price, lump sum payment,
milestones, and the construction completion process.
Unlike construction contracts, O&M contracts are not based on standard forms and so
will be bespoke in nature according to the procuring authority’s PPP project. In this
respect, the drafting of the O&M contract will be carried out in a similar way to the
drafting of a bespoke construction contract. The O&M contract will mirror the form and
content of the project agreement, and will contain a pass through of the project
agreement’s obligations to the O&M contractor. The O&M contract will contain
additional commercial terms, such as a yearly price with a formula for inflating it on a
yearly basis and life-cycle obligations.
The construction and O&M contracts written by the consortium’s legal team will contain
a number of key terms, as outlined in boxes 6A.4 and 6A.5.
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The approach to the pass through of the project agreement’s risks is illustrated as
follows in table 6A.3.
TABLE 6A.3: Project Agreement Risks
The consortium’s legal team will also need to consider and advise on the interface
issues that exist between the contractors. An example of such an issue is delay.
Should the construction program be delayed, then the O&M period will normally be
reduced because of the effect of the fixed PPP project term that means the operational
period cannot be extended by the length of the construction delay. A shorter O&M
period means that there will be less revenue available for the O&M contractor. The
O&M contractor, as it is not responsible for the construction delay, will wish to ensure
that it receives compensation from the construction contractor to cover its loss.
However, the O&M contractor has no direct contractual right to sue the construction
contractor for this loss. There is therefore the need to create a direct contractual
relationship between the O&M contractor and the construction contractor. This is done
through an interface agreement. It is the interface agreement that creates the
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6.8 Fundraising
6.8.1 Negotiating with Banks
The assumption made is that fully committed financing will not be required while the
consortium is bidding for the PPP project. Rather, it is assumed that fully-committed
financing will only be required once the consortium has been selected as the preferred
bidder for the PPP project. In this situation, it is normal for the detailed funding
arrangements to be put in place during the period between the appointment of
preferred bidder and the close of the PPP project. However, in such cases, during bid
preparation and before bid submission, the main terms of the project financing will
have to be negotiated and agreed, or at least defined as a detailed “term sheet” under
an indicative proposal. This is because the consortium needs to be confident that a
project funder is satisfied with its RFP proposal.
The consortium needs to know the basis on which a funder will provide support to the
PPP project. Ideally, this needs to be known prior to submission of the RFP response
because the cost of finance will drive the overall cost of that response. It will be
problematical if the consortium only gets its financing terms agreed after it has
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It should be noted that it is possible for the lender that has won the funding competition
to be a sole bank or a group of banks, known as a “club” (or “syndicate”). The
successful lender will enter into a mandate letter with the sponsors setting out the
terms of the loan; these terms will form the basis of the finance documentation that is
entered into at a later stage.
It will take a period of time to agree to the terms of the PPP project’s funding
documents25. The funder will need to be satisfied that its investment in the PPP project,
through the provision of funds, is suitably protected. The funder will want to ensure too
that the PPP project risk allocation will minimize any chance of project default
occurring.
As well as ensuring that there has been a robust approach to risk allocation, the
funders will want to ensure that the PPP project is structured in such a way as to give
them an acceptable level of risk protection. Typically, the banks will require full
disclosure of all PPP project information and data so that they can conduct their own
due diligence to understand the PPP project risks and, ultimately, fix their lending rates
and fees.
Some of the key ways the SPV will protect itself is through its limited liability, and by
passing through the risks contained in the project agreement to the construction and
O&M contractors. It will also expect these contractors to provide it with guarantees
from their parent companies. These parent company guarantees (PCGs) will ensure
that if the contractors fail to carry out their contractual obligations, then the parent
companies will assume responsibility for the obligations and/or provide financial
compensation to the SPV to cover the cost of the failure.
The funders will also adopt a series of key approaches to protect themselves against
the adverse effect of the PPP project’s risks. They will want to ensure that the passing
through of risks into the construction and O&M contracts is appropriate. The funders
will therefore scrutinize the passing down of obligations as part of their due diligence.
They will expect to see the allocation of risk as per table 6A.3 in section 6.7.3.
25Funding documents will not be finalized until all commercial elements of the project have been agreed.
Consequently, the procurement timetable should factor in a number of additional weeks after the commercial
agreement for concluding the finance documents.
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The key financing documents are those that govern the terms of the funding provided
to the SPV and the security for the money lent. The key document is the credit or loan
agreement that sets out the types of funds that the funders will provide to the SPV.
The funds, although provided under one loan agreement, will actually contain a
number of “ring-fenced” amounts, known as “facilities” that can only be used for their
agreed purpose.
The credit agreement is a baseline facility that will provide the SPV with funds to meet
the costs of construction and other pre-agreed costs that arise during the construction
period when the PPP project is not yet generating revenue.
The credit agreement will also include other facilities to be used as working capital to
cover the costs of implementing changes in law, or to meet life-cycle and maintenance
costs.
Like any other domestic loan, the credit agreement will set out how and when money
can be borrowed (that is, the draw-down requirements), and how and when it has to
be paid (that is, the loan repayment formula or repayment schedule). Typically, the
repayment of the PPP project debt will take place over the life of the PPP project on a
reducing basis. Usually the repayment schedule follows the PPP project’s cash flow
projections.
The funders will also require the credit agreement to contain measures to ensure the
financial robustness of the PPP project on an ongoing basis. These measures are
known as the financial ratios, and they should not be breached by the SPV. Ratios are
normally calculated and checked by the funders and the SPV every 6 months. The two
most common ratios that will have to be met are as follows.
• Loan Life Cover Ratio (LLCR) – this is used to measure the ability of the SPV
to pay back the funds. At any given point it compares the project’s projected
Net Present Value (NPV) of the cash flow available for debt repayment and the
amount of project debt remaining; and
• Annual Debt Service Cover Ratio (ADSCR) – this is used to compare the past
12 months of the project’s Net Present Value (NPV) of the cash flow for debt
repayment and the amount of debt repaid (principal and interests) during the
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The finance documents will also include the security package that the funders take as
their security for lending to the SPV. See box 6A.7. The security deed sets out what
security the funders have taken over the PPP project revenues and assets. The
funders will want to have the right to protect their interests in the PPP project,
especially if the PPP project gets into trouble. Therefore, the funders will enter into
direct agreements with the SPV and the construction and O&M contractors; this is so
they can step into these contracts and take over the running and role of the SPV should
the PPP project get into difficulty. Once the funders have got the project back on track
they will then step-out and the PPP project will continue to run with the SPV in control.
26The value of the required ADSCR will depend on project risk and the variability of cash flows. If the SPV does
not take demand risk, the minimum ADSCR would typically be: c. 1.2x -1.3x. However if the SPV accepts large
demand risk, a minimum ADSCR c. 2.0x would be required.
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The funder injects a significant amount of money into the PPP project, so it needs to
protect itself and ensure that it will get paid back all of the money it has lent, together
with the interest on the monies lent.
Full payment to the funder is predicated on the PPP project asset having been built
and operated in a manner that generates sufficient revenue to make the debt
repayment. To help ensure that, as far as is possible, this will happen in the future, the
funder will, before lending, carry out due diligence on the PPP project to satisfy itself
of the following conditions.
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The funders focus on the potential cash flows of a PPP project because this is the
main source for repaying the debt. During the PPP project’s Construction Phase, no
revenue will be generated because the procuring authority will not be receiving a
service and so the rule, “no service, no fee” applies. Following completion of
construction, however, the PPP asset will begin to generate revenue, whether that is
through the provision of government or users’ fees to the SPV.
The structure of the PPP project has been set out earlier. For the purposes of
understanding the flow of monies between parties, in order to ensure a successful
PPP project financing, the structure can be overlaid with the following arrangements
as outlined in figure 6A.14 and box 6A.8.
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Senior debt interest and repayments SPV payment of senior debt and
interest to the senior funders.
The PPP project funders will conduct a series of sensitivities to ensure that the
project’s cash flow projections are subject to as little risk as possible. Funders will
therefore perform the following tasks:
• Carry out due diligence on project running costs, and perform technical checks
on costing and life-cycle assumptions;
• Check to ensure that the risks have been passed through from the SPV to the
construction and O&M contractors and their sub-contractors;
• Identify ways of eliminating potential risks. For example, they may require the
SPV to enter into a hedging agreement to offset the effect of interest rate
fluctuations;
• Ensure the provision of adequate step-in rights;
• Require the inclusion of the funders’ “permission to act” clauses in the loan
documentation;
• Require the satisfaction of financial covenants in the loan agreements, including
requirements to build up cash levels to meet debt service payments in advance
of the payment becoming payable as well as retaining cash levels in excess of
those required to service debt;
• Require cash retention for debt service and major works or operating costs;
• Check the assignment of the benefit of the contracts between the SPV and the
procuring authority, including the income stream that the contracts will generate
in the future; and
• Request that the procuring authority provide additional information and
clarification on issues arising as part of the due diligence exercise.
The main forms of security that the funders require in a PPP project include the
following:
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Bank guarantees: The bank will require security in the form of guarantees to be given
in respect of the construction and O&M contracts. These guarantees are normally
given to the SPV by the parent company of the relevant contractor. The guarantees
cover the due diligence and proper performance of the contractor’s obligations under
the relevant contract. If the contractor fails to perform the obligations, then the parent
company will perform or procure the performance of the obligations. The parent
company will also indemnify the SPV for any losses or costs incurred as a result of the
failure of the contractor to perform. The benefit of the guarantees are assigned to the
bank, and if there is a default the bank can enforce the guarantees as appropriate.
Completion guarantees: The SPV may be required to obtain from the construction
contractor a guarantee that assures construction completion.
Income and shortfall guarantees: The SPV may be required to obtain an insurance
type policy that pays out for loss of income.
Letters of comfort: The funders may require the procuring authority to provide letters
of support to the SPV, guaranteeing that the government-pays charge will be met.
Fixed and floating charge/debentures: The funders may take a debenture over the
SPV as security for the senior debt. A debenture will charge all the property, assets,
and SPV’s undertakings in favor of the funders. The debenture will generally create
fixed charges over all of the SPV’s investments, land interests, plant and machinery,
rights to insurance proceeds, book and other debts as well as the SPV’s Intellectual
Property Rights (IPR), monies and uncalled capital. The debenture will also create a
floating charge over all of the SPV’s assets that are not otherwise effectively
mortgaged or charged under the fixed charges referred to above. The benefit of a fixed
charge over specified assets is that it gives the funder priority over preferential
creditors on enforcement. The benefit of a floating charge is that at crystallization the
funder can block the appointment of an administrator over the SPV by appointing an
administrative receiver.
Step-in rights: Such rights are normally contained in “direct agreements”. Direct
agreements are normally tri-partite and entered into between the procuring authority,
the SPV, and the funder.
Direct agreements: The funders will have the right to step into a project contract and
assume the rights and obligations of the SPV.
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Insurance: The bank will require the SPV to put in place certain project insurances,
and these will be assigned by way of security to the bank. Such insurances will include
insurance against physical damage or loss, third party liability, delay in startup and
business interruption. As the insurances are assigned to the bank, the SPV is required
to give notices of assignment to the insurer.
Commercial close means the point at which all the significant commercial issues
between the procuring authority and the consortium have been agreed. However, at
the commercial close stage, it may be the case that the SPV still has to be formed or
that the PPP project funding needs to be obtained or finalized. It is not necessary for
commercial close and financial close to take place simultaneously, or indeed to occur
in quick succession. Although these two scenarios are the most frequent in project
financing, it can be the case that financial close will happen some months/years after
commercial close.
A project is said to have reached financial close when all the project documentation
has been signed, all the pre-conditions attached to the PPP project’s financing have
been met, and the PPP project funding becomes available. The flowing of the funds
into the PPP project means that the SPV and its construction contractor can start to
carry out the construction works to build the facility.
There are many pre-conditions, sometimes more than 100, that have to be met. The
pre-conditions are referred to as “conditions precedent”. The conditions precedents
have to be provided/met by the PPP project parties prior to triggering financial close.
Generally they can be divided into 3 categories.
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The procuring authority will be responsible for preparing the project agreement.
However, the balance of the project documentation — construction and O&M
contracts, funding documents, and shareholder agreements (for details see the legal
solution section above) — will be prepared by the private parties to the PPP project.
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